Chicago Atlantic BDC, Inc. (LIEN) Earnings Call Transcript & Summary

We continue today with our series of webcast discussing the cannabis industry from the point of view of the various players in the industry. We're happy to welcome today Peter Sack. He is the Managing Director at Chicago Atlantic Group. Welcome, Peter.

Hi, Pablo. Thanks for having me.

So look, I mean, we have a lot to cover, but let's start with the general introduction. The way -- the audience is a mix of investors that follow cannabis very closely, and some of them are more on the finance side, right, following mortgage REITs, BDCs and maybe less cognizant of cannabis. But let's start with an introduction about the Chicago Atlantic Group. And the way I understand that the three main components, right, the REIT piece, the Mortgage REIT, the BDC and the private side. And if possible, please explain how the three components interact with each other and why it makes sense for the group to have these three different arms? And thanks again for joining us, Peter.

Absolutely. Thanks for having me. Chicago Atlantic is a private credit direct lender. We launched in 2019 to make investments in idiosyncratic areas of largely the U.S. economy, and to build unique risk/reward within the private credit sector and the industry in which we found particular opportunity and have grown considerably since our founding is in lending to the U.S. cannabis industry. We're now, we believe, the largest lender focused on the U.S. cannabis industry. We manage about $2.5 billion across our platform. We've made north of 200 investments just in the U.S. cannabis industry, in nearly every state legal jurisdiction in the country. And we focus on bottoms-up diligence, on building long-term relationships with our borrowers and delivering, we believe our superior an extraordinary and unique risk-adjusted returns to our investors, driven by the idiosyncratic nature of lending in the cannabis industry and driven by our focus and expertise in the space. We operate 3 main funding vehicles for our investments in the cannabis industry. We operate a publicly listed mortgage REIT called Chicago Atlantic Real Estate Financing. It trades under the ticker REFI. We manage a public BDC called Chicago Atlantic BDC, Inc. that trades under the ticker LIEN, L-I-E-N. And then we operate private funds. And someone may ask why operate three verticals? Why have so many funding vehicles to lend into the same industry? And I think the answer is a couple of things. One, we -- having multiple funds and multiple funding sources allows us to provide different types of solutions to different types of borrowers. We aim to provide -- be able to provide real estate-backed loans, cash flow lending, first lien loans, longer term, shorter term and a broad diversity of potential structures. Secondly, from a portfolio construction perspective, managing a set vehicles allows us to speak for and execute larger fundings to larger companies and a broader array of companies while still maintaining diversified portfolios for our investors. And then third, managing three different types of vehicles allows us to source different types of capital from different type of investors as well as banks and debt financing sources that might not be available if you're just managing one vehicle. And ultimately, I think what this allows us to do is to be the best partner with the most -- for availability of options for the largest range of potential companies across our industry. And I think -- I'm sure we'll get into this, but I think sourcing pipeline is the [ lifeline ] of what we do, and this allows us to build relationships with the broadest range of possible operators.

Right. And just staying as part to the introduction conversation, the -- in the case of mortgage REIT, I understand it's 100% cannabis. In the case of BDC, it's a little bit of blend. I don't know on the private side, and obviously, I'm not so sure how much you're going to disclose on the private side. But why is that? Why the BDC may be a blend, why the mortgage REIT on the cannabis and the private, again, if you want to disclose?

Our private funds and our BDCs are between 20% and 30% non-cannabis direct loans. We are -- we're private credit and -- or private credit and idiosyncratic credit investors by background, we've been focused on the cannabis industry for the last 7 years and built an organization with industry-leading expertise in that space. But our background is more broad than that. And oftentimes, we find cannabis prevents an extremely unique risk/reward profile. But we also occasionally find opportunities that exceed what we're finding in our cannabis pipeline. And for those opportunities, we want to be able to give our investors exposure to that.

Right. And again, one more and only if you can disclose as part of -- so people can understand the group. You talked about the $2 billion. I think that's the history over the years, right, in terms of how much loans you've made. We know the size of the book of the REIT. We know the size of the book of BDC, combined with the private side, be half of it? Or 1/3 or roughly? And again, don't disclose if you don't want to, Peter.

No. It's about $2.5 billion in total assets under management across the firm.

All right. That's good. Thank you for clarifying that. So look, we're going to move the discussion now to what I call the finance sector in general. I'm going to ask a few questions, and then you tell us what you can share. And this is before we get into cannabis, right? So how would you characterize investor sentiment right now in the Mortgage REIT sector and BDC sectors, ex-cannabis speaking in general? How does the interest rate environment affect the REIT and BDC Group in terms of volatility and also its direction or expectations for lower or higher rates given the volatile macro background, both economically and geopolitically, does that increase investor appetite for this sector or decrease it? If you can touch on those subjects first. And again, a reminder to the audience is a blend of cannabis people and people that are more on the finance side and less focus on cannabis, but thank you.

Yes, I think that the mortgage REIT and BDC sectors performed relatively negatively over the course of 2025. I think it's driven by two macro trends. One is declining interest rates and the broader mortgage REIT environment and BDC environment is negatively impacted by declining interest rates because debt portfolios are oriented towards floating rate loans, who's interest, the interest that they earn declines when benchmark rates such as prime or SOFR decline. And so the stock prices of Mortgage REITs and the BDC sector at large, declined under the expectation that the earnings of those vehicles would decline as benchmark rates declined. I think the second macro trend impacting REIT and BDC sectors has been, I think, trepidation with private credit and fear of private credit markets that have become saturated, that covenant packages and downside protection elements of debt investment have become weakened, and that the portfolios of some of the largest BDCs were not as strong as their management teams would portray them as. And a couple of large defaults and examples of fraud that came to light during the during 2024 such as First Brands and it created a small contagion among retail investment community that perhaps the book values of some of the larger BDCs and REITs had become -- was not as reliable as they once thought. So I think there were these two large elements that were driving negative performance in stock prices and Mortgage REIT and BDC sectors over 2025. And it's an interesting contrast with what we do here at Chicago Atlantic, but we invested in an industry that -- whose performance in many ways is not so tied to the broader macro environment, and our portfolios are much less exposed to downside risk, downside risk of interest rate declines than the broader BDC and Mortgage REITs by virtue of our high interest rate floors in our floating rate loan portfolio. And so I think we were -- our performance was somewhat impacted by that, but I'd say somewhat unjustifiably so.

Right. And at that point, and obviously, you disclosed this for the BDC and for the Mortgage REIT, the percent of your book that has floors at or above the current prime or SOFR rate. How would you compare that ratio with the ex-cannabis mortgage REITs and BDCs? It seems that you have a large -- more protection than the average, right? But if you can touch on that, if you have some numbers there.

No, it's really significant. So for the -- our mortgage REIT as an example, the way I like to describe it is that only 14% of our loan portfolio is exposed to rate declines of more than 100 basis points based on today's or any rate declines based on the prime rate back in when we announced our Q3 earnings, so that was 7%. So that number has only improved since then as rates have continued to decline. So as of Q3, only 14% of our portfolio in REFI was exposed to mortgage rate declines. And that's significant because a much larger proportion of our loan portfolio is floating rate. The difference is that when we negotiate our loans, we set a floor on that floating rate so that the lender gets the benefit if interest rates go up, but the lender does not suffer if interest rates go down. And we're able to negotiate that because we operate in an industry in which there are very few lenders operating in the space. It's just one example of how we're able to create unique risk/reward when structuring our loans and negotiating our loans and deploying capital.

Right. On that point, I'm probably saying something that's obvious to people that follow the finance sector, but maybe less so for the ones in cannabis, that those lenders outside of cannabis, they are borrowers if the floors are very high, would start just refinancing elsewhere, right? Like you said, in the case of cannabis, that's a tougher proposition for the borrowers.

It's a tougher proposition because there's just fewer lenders available. And also, it's a tougher proposition because we also structure a certain amount of [ call ] protection in our loans. So that we're guaranteed a certain amount of interest even if they refinance it early?

Okay. And again, not to repeat what you just said. So you're saying that in a way you are protection, the fees for early repayment and those types of things would be higher than average in other sectors?

Exactly.

Right. Before we move on to cannabis and lending in cannabis just at the macro level and without getting political, I've been listening to a lot of the conference calls from other BDCs, outside of cannabis, mortgage REITs outside of cannabis. And the conversation is a lot about some of the, what I would call the political issues, right, the potential caps mortgage rates, caps on credit cards or on spreads, fed volatility because of a discussion around fed independence, and again, not to get political here, but does it have any relevance or does it influence sentiment in the sector overall and even in your sector also? Any comment you can make Peter here.

I think declining interest rates are generally credit are positive for us because it leads to stronger investor sentiment, stronger eagerness to deploy capital, more risk on and receiving attitude amongst investor groups. And I think it leads to more interest in growing sectors like cannabis, that are growing -- that have growth attributes that are not necessarily directly correlated to the U.S. economy. I think that cannabis has industry-specific tailwinds driving its growth and driving specific operators within the cannabis industry's growth that are disconnected from trade war -- disconnected from Fed executive branch conflict. And so I think it's a particular fit for investors that are looking to add diversification and exposure to a part of the U.S. economy that they probably don't have through other assets of their investments of mutual funds and ETFs and the ordinary S&P tickers. So whether it's looking for alternative investment, private credit, private credit exposure, BDC exposure, mortgage REIT exposure a few lenders to which you can deploy capital in the space. The focus on this space are pretty clearly diversifying for most investors.

Right. Understood. Okay. So I want to move again the discussion now to the rationale for investors to invest in mortgage REITs in the cannabis sector or BDCs in the cannabis sector, there are two now, right? AFC Gamma, Advanced Flower Capital, and yourselves and the Chicago Atlantic Group side on the BDC front, and again, if you answered the question already in part, I'm going to repeat it if you want to add anything, but I think you touched on already. Speaking in general terms, what is the pitch to investors to invest in cannabis REITs and cannabis BDCs. Is it all about better risk/reward. But again, I don't want to make -- I know you answered part of that, but anything you want to add on that question specifically.

Yes. Look, I think risk/reward is fundamental to all of this. But as both risk and reward. I think when you compare our loan books to broader private credit industry, the comparison is very stark. We tend to lend to cannabis operators at much lower leverage than the broader private credit industry. We deploy loans at 1x to 2x EBITDA, whereas the broader private credit industry, particularly loans to sponsored private equity-backed companies are lending at 4x to 6x EBITDA. We lend to companies based on company's real EBITDA, not their adjusted EBITDA after negotiating with a private equity sponsor over the terms of what adjustments to EBITDA are allowed. We have real covenants in our loans. And then on top of that, we built a diversified portfolio that generates dividend returns that are comparable with the broader private credit space or exceed the broader private credit space, but with a portfolio that has a greater proportion of first lien debt and a portfolio that is much less levered than the broader private credit industry, even if we were to deploy our full credit -- the full credit facility is available to us in REFI and LIEN. And so I think it's a differentiated risk profile at the investment level and its differentiated risk profile at the portfolio level, and it's a diversification opportunity that makes these vehicles really distinct from anything else in the BDC and Mortgage REIT sector. I mean to give you an example, our BDC Chicago Atlantic -- Chicago Atlantic BDC, Inc. I don't think there is not a single other publicly traded BDC that owns a position in our book that I'm aware of, whereas one of the other challenges with the largest -- with some of -- particularly the larger BDCs in the market is that they're all kind of investing in the same profile of deals. And in many cases, they're co-investing alongside one another in the exact same deals. And so you may think that by buying Owl Rock and Ares, your diversifying managers. But actually, these managers, in many cases, are investing in the exact same portfolio companies alongside one another. And so we're uniquely positioned in that regard and that investment when you buy a share of LIEN, you're buying exposure to a portfolio of investments that you cannot get through any other publicly traded BDC.

Right. That's great color there. Look, on the same topic, I realize it's a different sector, the sale leaseback operators but remind the audience of the advantage of BDC and REIT lending versus sale leaseback operators? And again, there's not so much advantage but the differences.

I think the biggest differentiator is [ duration risk ] and all of the risk that go along with duration. Obviously, duration of risk, most people, financial investors [ and the ] interest rate risk. [indiscernible]. So when I say [ duration risk ] the fundamental risks associated with long tenure loans that are loans are in the 2 to 4 years duration, where in the sale leaseback. Are you in a company such as IR, innovative industrial [indiscernible] acquires a cultivation facility and leases it to an operator, that's a 10- to 30-year lease. And so [ IPR ] needs to be confident that the cultivation facility that it's acquiring and leasing to an operator is an asset that's going to be useful as a cannabis cultivation facility for the next 10 to 30 years. And that's a challenging investment. That's a challenging investment threshold for assets that have relatively -- that are very expensive to build and are much less valuable at free purpose to another use. And so I find that -- I think that as a lender, we're able to much more nimbly reallocate our exposures across the sector and across the industry as the industry evolves. And as different opportunities arise that when a loan matures, we have the opportunity to decide do we want to redeploy with borrower. Do we want to redeploy the proceeds in the state or in this market? Or do we want to take it to different borrowers in different states in different markets because the risk profile are better or the reward profile is better or that state or market is growing differently. And so I think that -- the uncertainty associated with long time frames is the single most important piece, particularly when focused on cultivation assets.

Right. And just staying on the duration risk, and again, going back to the comparison with mortgage rates outside of cannabis. Again, when I listen to those conference calls, a lot of discussion over duration risk. We defer to see that the duration on average of the Chicago Atlantic Mortgage REIT is a lot less than your average mortgage REIT out there or not necessarily. I mean I'm trying to compare.

Our portfolio is less than 2 years. Our portfolio duration is less than 2 years.

On the average mortgage REIT over there, outside cannabis would be what?

I don't know the number off the top of my head, but it's a -- it's much more than 2 years.

Yes. Hence all the discussion about the mortgage duration risk in those calls. And then just staying on that same...

It's more than 2 years -- I'm sorry, go on Pablo.

No. And then just staying on that conversation about. I think you touched on it. But again, when I hear those calls, I hear a lot of about agency risk or agency fees or companies being part of syndicate. It just seems like a lot of them, and I know you've touched on this, but a lot of them at end of day, a lot of what's on their books is not something that they really originated themselves, right? Of course, they done their due diligence, but other people were on the ground, if you want, kicking the tires as they say. In the case of your book, pretty much originated pretty much everything yourself. Am I exaggerating or is that true?

Absolutely. We lead an agent nearly all of our transactions. And there's a couple of advantages to that. One is, obviously, it means that we drive our diligence. It means that we own the relationship and extremely value the relationship with the borrower. So that means that we change those marginally to continue to grow with borrowers as they grow. And it means that we're responsible for documentation. We are responsible for bolting the standard downside protection that underlies these contracts. And it means it gives us much more control and flexibility over how we allocate those opportunities over the long term. And so -- and I think fundamental to this is the platform that we've built. The largest origination platform in the cannabis industry, the largest underwriting team within the cannabis industry, a dedicated real estate underwriting team, a dedicated analytics team. And this type of platform and investment is and the head count relative to our assets under management is unheard of within the private credit space. And it allows us to take all of these resources and focus on expertise and value creation within this industry for the benefit of our fund and investors.

Right. Now stay on the same type of line of questions. Here, if you want to beat your stock, those investors that mainly focus on [ plant ] touching stocks in the cannabis space. What do you say to them in terms of comparing an investment advantaging in stock versus investing in the what we call the finance cannabis ecosystem? And again, I know it's not one or the other, but what would you say in that sense.

It's not one or the other, but I think we focused on creating a downside protection, a downside -- of accessing the cannabis industry through a relatively downside protected approach and venue and that's through first lien senior secured financing and found that because of the limited competitive set of lenders within the space that as a first loan senior secured lender, we can create unique downside protection and a really attractive yield for our investors. And that approach has allowed us to continue to earn attractive returns for our investors when cannabis stocks were booming and MSOS was trading in the 60s and 70s and when MSOS is trading below $5. And in a period in which MSOS has declined since has declined by at 1 point close to 90%. We still generated attractive dividends for our investors across all of our vehicles with a very low rate of default and nonaccrual across the portfolio. I think it's pretty unique. And it's pretty rare that you find an operator that delivers such profitable, consistent results at a time when equities in the space have declined so precipitously. And that's really what we've sought to achieve here is exposure to create low volatility exposure to what can be a volatile industry.

Thank you. That's great color there. Look, we move on discussion now to the impact that we are seeing from the cannabis regulatory news flow. I'll ask a couple of questions here, with rescheduling to [ 3 ] with all the news flow, especially what happened on December 18, is there more demand for credit from the operators? I'm going to have one more question here. What operator cash flow should improve given [indiscernible] removal and this will increase the credit quality of your borrowers, this could also attract more credit suppliers, right? This is true, would there be more competition? And you're seeing that the competition start to emerge because the credit worthiness would be better, higher now? Thoughts on that.

We're absolutely seeing more demand in the market on the expectation that rescheduling will occur in 2026. And I think it's driven by equity optimism. that have renewed the lease that fundamentally, you see it in public equities but over the course of 2025, public equities rallied. That translates down to private operators because private operators see that for every dollar that they invest to generate $1 of EBITDA, that EBITDA will be valued at a higher multiple. And so you're seeing operators and equity investors deploying further in growth, deploying more -- investing more in M&A and inorganic expansion. And with each of those decisions, that opens up opportunities for us to lend alongside the equity. And so we're busier than ever. And looking to support the best operators in the industry as they look to achieve their goals. On the capital supply side, you certainly see more you've seen some more equity capital into the space as evidenced by stock prices increasing. We haven't yet to see new lenders into the cannabis market, neither in the bank and institutional world or the broader private credit and alternative financing space. And it's driven by a couple of things. One, rescheduling hasn't happened yet. And then B, rescheduling doesn't solve the fundamental problems that prevent capital -- especially debt capital sources from entering in the industry. And those fundamental problems include that cannabis is still an illicit substance, whether it's a Schedule I illicit substance or a Schedule III illicit substance. It's still an illicit substance. The same regulatory controls and restrictions will apply for banks as a Schedule III substance as they did on the Schedule I substance. The limited partners, the investors that back the private credit industry, which are endowments, pension funds, sovereign wealth funds, Schedule III does not change fundamentally their view of the cannabis industry. And so unfortunately, the same hurdles that prevent capital flowing into the credit side of the financial industry, those hurdles still exist in a recycling environment. I think what we look forward to, and we think we'll be an even more -- perhaps an even more significant development than simply rescheduling would be the opportunity for cannabis companies to list on U.S. exchanges. I think that's the next -- the next change that would be most transformational for our industry's assets to capital, more than safe banking more than an executive memo or an executive order, but access to equity capital through the New York Stock Exchange and the NASDAQ would be transformational.

On that point, I want to stay on topic, but on that point of up-listing to the U.S. exchanges. Do you think that's possible if cannabis remains fairly illegal even though we move into Schedule III?

It's difficult to say. I think it's possible, though. I think it's possible. I think with executive guidance. Executive guidance from the SEC and the DOJ, I think it's possible.

Right. I agree. Okay. We'll move on to discussion now in terms of your views on how scheduling -- rescheduling plays out and its impact, right? I'm going to read three questions here, if you touch on them. Highlight the quantitative and qualitative benefits of rescheduling? And again, a reminder, Peter, some of the audience is noncannabis, some is cannabis, right? So that's the first question. And second one, assuming the DOJ publishes a final rule by January 30, when does S-3 become effective for 280E purpose January 1, 2026, or when or does it go back in time? And then the third question, any predictions of what happens to the unpaid portion of past 280E tax liabilities called long-term and certain tax benefits on the balance sheet. Is that a [ pardon, a haircut ], restructuring plus payment plans, what would you say to that?

For those not familiar, in Trump's Executive Order, he ordered the Justice Department to pursue the rescheduling of cannabis from a Schedule 1 illicit substance, under the controlled substance act to a Schedule III illicit substance under the controlled substance act, which is a less restrictive qualification. For cannabis operators, there's a significant economic impact of this in the operators who are manufacturing and distributing. Schedule I substance are subject to much more punitive tax regime than operators that are manufacturing and distributing a Schedule III substance. The impact in many cases, can increase the post-tax earnings of the cannabis operator by 25%, 50% or 75% depending on the starting point. Specifically, it allows cannabis companies that previously could not deduct overhead expenses from their taxable income now can deduct overhead expenses just like any other corporation operating in the U.S. So the immediate cash flow implications are very significant. And the improvement in cash flow, then obviously, as an implication for how these equities are valued and how these equities are valued using capital for [indiscernible] and private operators. What that means for our liabilities companies to have improved over the past 5, 6, 7 years is a different question. Many of the large public and private companies have opted not to pay those taxes that have accrued on their balance sheet over the past years in the hopes that someday they might be forgiven or never collected by the IRS. I'm not a tax attorney, but I underwrite our investments assuming that those taxes will eventually have to be paid. They are a real liability held on the balance sheet of operators, and they may be a different flavor of liability, but I view them as still a liability that will have to be paid, and we make our investments on that basis. That being said, rescheduling is still very important for the industry and a great step forward.

On that -- on the point of the timing. If it's -- let's say, we get the final rule, that scheduling gets done, right, per the procedure per statute in 2026. That means that 280E would not apply starting January 1, 2026, right? I mean maybe I'm saying something obvious, but do you agree with that? Or could someone make the argument that we should go back to 2023 when the HHS publihsed a 252-page report.

As an investor, I underwrite assuming that the tax benefit will only become effective in 2026. I suspect other people have different opinions. But as an investor, I deploy capital with that assumption.

Look, we're going to now talk about broader capital markets impact from all these news flow. And I know we touched on the part already, based on the feedback you've been getting from the various operators, right? The first question would be other than share price wins, how would you characterize investor response to the rescheduling news flow, more inbounds from potential investors. And I'm talking about operators, right, I'm asking here to speak on behalf of the operators, are they getting more inbounds from potential investors. Is there more private capital available to these companies? Is there more debt capital? That's one question. Second, if SAFER we're soon to follow rescheduling, how that impact your business? And then bigger picture, does the thesis of cannabis finance companies benefiting from this imbalance on demand supply of capital still play out if we have SAFER banking and risk scheduling? I know there's a lot there.

No. But good topics to cover. On equity capital markets, on the public equity capital markets, I think we saw the impact well before Trump made his announcement that the impact of rescheduling occurred, in the 6 months prior to that. And Trump actually made an announcement, the market declined. But I think that's because there was so much enthusiasm and expectation that it was going to occur, in the month leading up to this announcement. In private equity markets, we have seen more enthusiasm and interest and ability of private operators to raise private equity capital to start their businesses from opening dispensaries to raising additional capital from existing investors to grow their businesses. But I would say that it is focused more on established companies with a proven track record looking to raise capital for their next growth initiative, rather than...

I'm sorry to interrupt. There you're talking about the equity capital for the private companies. Yes, go on. Sorry.

Yes. Speaking to the equity capital. In debt capital markets, we've not seen a significant new inflow of lenders operating in the space nor have we seen a change in temperament of the few existing debt capital providers in the space.

Right. And then on the question SAFER, I know we touched on it partly before, but if you want to talk about the potential impact on your business, if we had SAFER banking this year, and again, if we have rescheduling and SAFER, does the thesis of benefiting from this capital imbalance, demand supply imbalance in the sector still play out for you?

The SAFER Banking Act, it's the text of the law would seem to be very powerful. It explicitly permits banks and other financial institutions to provide commercial services to the state regulated banking industry without fear of prosecution. It explicitly premise banks to make loans to the cannabis industry. The challenge with the SAFER Banking Act is that banks are not the leading provider of private credit to mid-market businesses in the U.S. today. They are not the key credit provider to support growth of this industry. And I don't say that because there's something unique about the cannabis industry its because banks aren't the leading provider of credit to middle-market businesses anywhere in the U.S. economy anymore. And what we really need are -- what we really need and what's going to take a lot longer for there to be more availability of credit capital, is the entire ecosystem of credit and especially private credit to open up to the cannabis industry. You need banks that lend to credit providers like us to be more willing to lend against portfolios of loans. You need credit rating agencies like S&P and Moody's and Finch to rate cannabis bonds, they will not do so today. You need insurance companies to be permitted by their regulators to invest in cannabis operators. You need custodians to -- across the country to be willing to hold cannabis bonds, many adult today. You need the big core accounting agencies, accounting companies to be permitted and to be eager to audit cannabis companies. And this whole ecosystem is what creates the U.S. debt capital markets. And unfortunately, the SAFER Banking Act is not sufficient to open that ecosystem up to the cannabis industry. I think in addition, we have a problem of cannabis seems so low on the priority list of reforms of U.S. in Congress that SAFER Banking seems very, very far away. But to be clear, at Chicago Atlantic, we would welcome it, and we think we would be significant beneficiaries of something like SAFER Banking. We spend a lot of time in the credit markets looking to raise credit facilities. We've raised unsecured notes in our public vehicles. We build relationships with all of the banks that currently operate -- that we can find that operate within the cannabis industry. And with an aim to be their preferred deployment source into the industry. We've had a lot of success raising credit facilities and deploying those credit facilities over the years. And so we think that we're going to be the first beneficiary of capital markets opening for the cannabis industry.

That's great. Thank you. Look, Peter, we want to move the discussion now to specific questions on the BDC and then on the mortgage REIT. I have a few questions with BDC, I'll start with just three. Maybe briefly recap the third quarter performance and remind us of any forward comments that were made for the BDC? Also, you had much larger-than-expected early repayments in the third quarter. Remind us what was the context for that? And then on the BDC, you have said earlier this year that you plan to fully redeploy your credit line in 2025, but this seems unlikely now. So if you can comment on that first, on the BDC.

Sure. We had a strong earnings quarter in the BDC and a strong deployment quarter in Q3. We deployed north of $60 million within the quarter, which is a very large deployment quarter for a vehicle of our size. The challenge is that we also had a significant number of repayments. And so our net deployment for the quarter were not as strong as we would like. We earned a significant amount of prepayment penalties associated with those fees -- prepayment fees related to those prepayments that are already benefited from -- but it continues -- it seems to have to continue to [indiscernible]. And I think this is the challenge of strong underwriting when you underwrite well, your portfolio companies perform well. And oftentimes, they're able to pay you off. And that's okay. And it's both -- it's a marker of our success, and a marker of our continual challenge to find more -- to find more opportunities, continue to build -- to build relationships and continue to deploy within the industry. I won't speak to full year 2025 guidance until later this spring. But ultimately, we build an originations pipeline that takes a very long time to develop. The north of $60 million that we originated and deployed -- that we deployed in Q3, not originated in Q3. That was originated over the course of relationships that we built in some cases over many years. And so while we can -- while we continually invest in building and growing that pipeline, unfortunately, our -- the repayment schedule is harder to predict. And so -- it so happens that we had more repayments than we expected. But luckily, we've continued to invest in our originations and our deployment, and I expect 2026 to be a very fulsome year of investing.

That's great. And staying with the BDC from our stance, and again, my read could be wrong, of course, but from our stance, you have a riskier portfolio than the Mortgage REIT in the BDC, given that you operate with a lot of -- with several smaller private cannabis companies in the loan book. Is this read wrong? And again, I know that in the case of the REIT, we're not necessarily the name of every borrower, but from outside, it just seems that a lot of smaller companies, private companies that would represent maybe higher risk than what we see in the mortgage REIT. Is this the wrong interpretation? Wrong read?

Yes. I think it's not necessarily supported by the data that the profile of borrower and the BDC and the mortgage REIT is actually quite similar, and the breakdown of private versus public is we view not material to the risk/reward of the two vehicles.

Thank you. Look, again, this is talking to one of your competitors. And again, we cannot comment much on our competitors, but -- go on. Sorry, peter, go on yes. Did you want to add something?

I think the small company -- large company dynamic is also -- is not necessarily the right way to look at it. But we have relationships and have deployed capital with some of the strongest public and large cap operators in the space. But I actually believe that our best risk/reward in our portfolio is not with the largest operators, not with publicly traded operators, but with 1 and 2 levels smaller than that, that we're able to create lower risk, I think, opportunities by lending to private companies that are often diversified across multiple states that are always diversified by retail and wholesale and the diversity of income sources. And amongst those smaller operators, the relationship matters more, the underwriting matters more, and there's even fewer debt capital providers options available for them. And so that means we take competitive advantage in our limited competitive set of lenders, most importantly, structure uniquely positioned downside risk, not necessarily as the first priority, stronger interest rates. And so -- and I think oftentimes, you find that many of the -- of our competitors that have entered the space and subsequently left the space have found more pit falls within the larger public operators than the smaller operators for that reason, that tends to be not as well underwritten and not as well controlled [indiscernible]. So our bread and butter will always be supporting medium and small operators. We will also continue to support large operators bank. We have the largest impact and our investor benefit the most when we can support growing small companies.

Right. Look, the next question is one of the competitor and comment only if you want, you can. Until recently, Chicago Atlantic BDC was only BDC in the cannabis space. Now AFC Gamma is also BDC in the space. That means a new source of competition, any comments we thought you want to leave there. It just seems that in the same pie, maybe that means a bit of a share loss for the potential opportunities for LIEN, but you tell me.

I think, I guess, AFC Gamma is a very smart group of individuals that understand investing well. And they were a competitor as a mortgage REIT or as a BDC, the competitive dynamic is very similar. So I don't anticipate as if it change related to this. In some ways, I think -- while converting from a mortgage REIT to a BDC increases their opportunity to deploy because they're not limited to only real estate-backed deals. It also, in some ways, limits their ability to deploy it because they have a much stronger diversification requirements as a BDC than as a mortgage REIT. And so it forces them to seek out risk in a larger number of smaller loan transactions, which can be difficult to deploy into. And it changes our competitive dynamics very much. And competitions isn't always a bad thing.

Thank you. And the last two questions on the BDC. If you want to talk about the spreads, I mean, your cost of funds on the BDC, you're due to maturity. And then by the same token, remind us how high would you take the debt leverage on the BDC?

So today in BDC, we had a $100 million revolving credit facility available. We seek to consistently deploy that facility before we seek to find additional debt capital sources. But I suspect that in any circumstances in the immediate future will continue to be much less levered than the broader BDC than the broader BDC market.

Thank you. Look, just moving the discussion now to the mortgage REIT, why does it make sense for the BDC to lend outside cannabis, but not for the mortgage REIT?

I think real estate lending and middle market business lending, obvious are very different markets. And in middle-market lending, there's an idiosyncratic areas of the market and idiosyncratic niches and opportunities that the BDC can originate opportunities whose risk-reward meets and exceeds what we find in the cannabis industry opportunistically. And I think that's a much higher -- that's a much more difficult threshold to exceed in the broader real estate industry where competitive dynamics in the lending market and landscapes are just very different.

Right. Thank you. Again, a similar question on the mortgage REIT, if you can recap third quarter performance and remind us of any forward comments you made now for REFI?

Our forward comments were limited. In the third quarter, we continued to deliver a stable earnings and dividends. We [indiscernible] and we continue to communicate that we are [indiscernible] we're targeting portfolio growth through the year. The pipeline for both real estate and non-real estate backed loans is extremely strong. We announced and announced with one of our borrower partners, Verano. Just as we upsized the real estate-backed revolver with the company as one example. And similar to the BDC, we expect on the tails of rescheduling that there's additional equity capital is deployed in this industry, particularly for M&A, that REFI and LIEN are going to be beneficiaries of that in deployment.

Right. Look, I'm going to stay on topic. But given you went back to that point on M&A, because a lot of M&A so far has been funded with everything, right, by the operators. But you're saying they're willing to take cash loans from someone actually like Atlantic so they can fund some of the M&A with cash. Is that what you're saying?

I think the -- there has been equity focused M&A that's been driven by, I think, the most publicly announced M&A has been driven by reorganizations and divestitures with among a handful of operators. So I think we all know there's a handful of larger companies that are pursuing operational and balance sheet restructurings, and we've supported healthy operators seeking to buy many of those assets across our platform. We were helpful in Vireo's acquisition of [indiscernible]. We supported some of the large public operators that are going through organizations and [indiscernible]. We've supported term sheets for many people to acquire those assets. Oftentimes, we're supporting many buyers at the same time for the same assets. And so regardless of the currency, there's -- if the asset is healthy, there's an amount of leverage that will be -- that we'll be comfortable to provide it.

Right. And then can we just touch on any -- on the non-accruals of the mortgage REIT, if you can just provide an update there, if my numbers are right, it's about $25 million or almost a $400 million book, but just some context there, if you can provide?

I think we -- I think our largest and most persistent nonaccrual, we expect to be resolved and [indiscernible] put back on accrual status within the near future. If a foreclosure process that we completed in 2025, the business was recapitalized new loan was replaced within REFI, and the operations of the business have recovered significantly since its recapitalization, and we hope to be able to announce its impact on accrual status in the near future.

Last couple of questions on REFI. Does REFI see opportunities to take equity stakes in some of your borrowers. Like either direct equity stakes or swapping debt for equity?

Both REFI and LIEN due to their NASDAQ listing are prohibited from holding equity in cannabis operators. There's other mechanisms that they can be compensated, take large fees, large exit fees, onetime fees. But unfortunately, at this time, NASDAQ still prohibits these vehicles from holding equity in cannabis companies unfortunately.

Similar question on REFI about the debt leverage, how high can you take the debt leverage on REFI or remind us of the credit facilities that you have access to?

Our credits -- our existing credit facilities limit total leverage in the BDC -- in mortgage REIT in REFI to approximately $200 million. And we are still well below that leverage level today.

Right...

Even if we were to fully deploy that leverage capacity, the vehicle would still be significantly underlevered relative to the broader mortgage REIT index.

Yes. Look. And the last question on both companies, Peter. Just remind us of the -- the metrics in terms of the floors, right, percentage of the book that you have floors at or below above current rates on the BDC and on REFI, if you can give those numbers again.

Yes, absolutely. So I'd like to frame it a little bit differently. But in REFI only 14% of our loan portfolio is exposed to interest rate declines as of Q3 from the Q3 benchmark. And the numbers -- the metric is very similar for the BDC.

Right. Thank you. Look, I know we're going to be running out of time here. We very much appreciate all the color you provided. I want to ask you a couple of more questions. Regarding Vireo growth, we realized that Vireo growth and up and coming, even so, building a very attractive portfolio assets, I must say. But we realize this is a totally separate entity from Chicago Atlantic, right? But given the Vireo Growth CEO, is also part of Chicago Atlantic Group. Does this help or hinder relationships with potential borrowers or it's just -- it has no effect. It's just a neutral factor in any event.

I think Vireo growth is the best example that I can give of how we at Chicago Atlantic play a very active role in supporting our borrowers' growth initiatives. Vireo was a longtime borrower of the Chicago Atlantic's private funds and REFI. And over the course of 2024, Chicago Atlantic partnered with the Board and the management team of Vireo to support their acquisition strategy and they acquired in that process Chicago Atlantic supported Vireo in an acquisition in Missouri, Utah and Nevada that really changed footprint of the company and transformed the business, so much that my partner, John Mazarakis decided to take step back from his operations of our lending business to focus on guiding that new team and that new orientation of Vireo. And while that's particularly transformational and public, it's the same thing that we're doing with all of our operators across the country on a daily basis, just usually on a much lower scale. It's introducing an operator to an acquisition operator of a chain of other dispensaries. It's introducing a Maryland operator to a social equity operator that's looking for capital to build their dispensary or looking to find shelf space. These are the type of partnerships that is fundamental to what we do. And so our unique relationship with Vireo is one that I count as positive, one that we described to our relationship across the industry. And it [indiscernible] I want to replicate. I want to replicate with more operators to grow and bring this [indiscernible]. I think that, we set this whole time in the whole call basically. The fundamental theme underlying our conversation has been capital constraints, a lack of liquidity and capital to cannabis operators and cannabis operators in the industry. I think it would be even more fundamental the cannabis industry [indiscernible] is being able to come together two operators, two competitors to come together to achieve something where combination is better than individuals operating individually that to create that product to create that bond. That trust is [indiscernible] our track record of execution, our ability to do what we say we do and use that as leverage to bring people together and allow parties to achieve their goals of growth [indiscernible].

That's great. Thank you. Peter, before we have the closing remarks, I'll just read a couple of few questions I received here. Let me just filter some of them. Someone is asking, and I'll make sure we finish at the 3:00 p.m. sharp. Looking long term, right, some day cannabis is fairly legal. People say, what does Google, Shopify representing the competition to the [indiscernible] of the world, right? I mean don't answer that. But in terms of your sector, right, when the those diversified BDCs diversified mortgage REITs can enter the space, it just seems that it would take a while for them to build the relationships that you've had in the sector, right, but just a brief answer on that. If you want to try to characterize that. But be brief.

Absolutely. I think we're going to be the first beneficiaries of openness in the financial sector to the cannabis industry. We have a lot more access to capital, both debt and equity capital. Our borrowers are going to have a lot more access to capital. And fundamentally, cannabis is still extremely fragmented market. I think within the industry, people like to talk about the positive and negatives of consolidation, but this is still an extremely consolidated industry, driven in large part by the state-based regulatory framework. It's going to take a very long time for -- even if the world, the financial world were to change tomorrow, take a very long time fundamentally for organizations to get up to speed with regulatory frameworks and supply and demand dynamics and market competitive aspects of each of the 40 states for where cannabis is legal. And that's the diligence piece that we do in each of the 40 states before we've made a single investment. And so we welcome it. We're excited by every step of openness that occurs within the financial services sector.

Yes. Thank you. Look, just a short answer. We touched on this before but someone asking, how do uncertain tax positions of cannabis operators factor into your risk/reward framework?

Yes a question from Ian Dominguez who I respect a lot. I think uncertain tax positions, we view as leverage. That until there's certainty brought to how the IRS will treat those tax statements, we treat it as a liability that we expect to be paid. And we generally limit the ability of our borrowers to incur such uncertain tax liabilities as part of the covenants in our loan agreements.

Right. One more question given all the structural advantages you talked about, why are the public vehicles trading at such low multiples of NAV? I mean or at par...

No, absolutely. I think it's -- I think that it's driven by -- that were being affected by the same I'd say, negative tailwinds driving the same trend of mortgage REIT and BDC index more broadly, unfortunately. I think it's unjustified for a number of reasons because our leverage is a lot lower than those indexes. Our performance in terms of performance is a lot different from those operators. And we're lending into very different markets and competitive dynamics in the broader BDC and LIEN markets. So while I think it's unjustified, I think when you look at our comparable metrics or comparable metrics we are clearly distinct outliers within the industry. But unfortunately, I think we've been subjected to the same industry sentiment.

And the very last question, someone asking if you can comment on the dividend coverage, both REFI and LIEN?

We put a high priority on maintaining our -- on maintaining our regular dividend and have not made any intentions cleared to the country.

Right. Great. Thank you very much, Peter, if you want to make any closing remarks, but great color. We very much appreciate your time. Thank you to the audience. Peter, go ahead.

I appreciate the opportunity to talk about our vehicles, particularly in this long period of time between Q3 earnings and Q4 earnings. In the meantime, we Chicago Atlantic continue to deploy, continue to execute on our pipeline. And we'll continue to build relationships in the industry and are always eager to meet new operators, people entering the space and either investors or operators interested in the space. I appreciate the time, Pablo.

That's great. Thank you very much, Peter. I hope you feel better. Thanks, everyone, for joining. Everyone, have a good day.